1. BY: Benjaphon Peuchsingha & Himanshu Kumar (M3 2014-16), Institute of Technology & Management, Khargar, Navi Mumbai
LOGISTICS OUTSOURCING
T I G H T R O P E W A L K F O R B A L A N C I N G L O G I S T I C S P E R F O R M A N C E A N D C O N T R O L
The contemporary dynamic business environment
is characterized by the short life span of the
products due to high frequency of introducing
new products in market. It has become a daunting
challenge for the companies to introduce
differentiated products to meet the customer
demands using supply chain management as its
objective is to share resources, line up goals and
join up forces across company borders.
Outsourcing of different levels of logistics plays
vital role to make the logistics operations more
efficient and has greater impact on performance
of logistics service. In the current dynamic era
which is described by market volatility, cycle
times, constant change, and demand to reduce
costs attached with the globalization trend has
driven the rising need to outsource the business
Abstract
Introduction
Logistics is the backbone of the economy,
providing the efficient, cost effective flow of
goods on which other commercial sectors depend.
The logistics industry in India is evolving rapidly
and it is the interplay of infrastructure, technology
and new types of service providers that will define
whether the industry is able to help its customers
reduce their logistics costs and provide effective
services.
Despite weak economic sentiments, the logistics &
warehousing industry continued to witness growth
largely due to growth in retail, e-commerce and
manufacturing sectors. India Spend around 13% of
its GDP on logistics. This is higher than USA (10%)
Europe (11%) Japan (10%) Inefficient practices have
CONTENTS
Abstract 1
Introduction 1
Method 2
Result 2
Discussion 3
Conclusion 3
Reference 5
operations. The return on assets of user’s firm can
be improved by outsourcing. Returns can be
improved significantly through outsourcing by
properly managing investments in material
handling, order picking, warehouse facilities, and
information technology and transportation
equipment.
inflated the industry size. The Indian Logistic
Sector is estimated to be worth $385 billion in
2015 as reported by the experts. In the first
quarter of 2014, the Indian logistics industry was
said to be worth $100 billion and currently it is
expected to grow by 15-20 per cent. This growth
rate is also expected to pave way to a lot of job
opportunities in the sector.
Indian Logistic Sector, formed by a majority of
small players is highly fragmented which in turn
creeps in inefficiencies in the overall supply chain.
Countries such as USA and Japan have lower
marginal GDP spent on logistics owing to the fact
that even smaller businesses in these countries are
able to optimize their Supply chain management
with the latest market trends.

2. Page 2 Logistics Outsourcing-Method
The two important factors of outsourcing are
flexibility and emerging technology of third
parties. Firms can hire the services of third party
logistics at their ease rather than to implement
and develop new technologies in house, as it
would be costly and time consuming activity.
Alternatively, resourcefulness of third parties
facilities firms to develop in technology, location,
control and rotating permanent costs into
changeable costs. Third party logistics providers
are capable enough to reconstitute the delivery
system to change to technological advances or
altering markets that hiring the services of 3pl
providers is a greater need of small companies.
They are tending to be more interested to acquire
skills and support in the field of technology of
third parties.
Four Levels of Logistics Activities Goldsmith
(1989) stated that public warehousing, in the field
of logistics, may be considered as oldest type of
outsourcing. Whereas Richardson (1992)
suggested that transportation, imports and
exports, marketing, distribution and packaging
are as well. According to (Hill, 1994) third party
logistics providers are also responsible for
deciding how commodities are packaged for
shipment, where they are stored, and in selecting
the most suitable way of shipping them to the
customer, is justifiable. The trend of utilizing the
third party providers for the activities related to
value addition like quality control and assembling
is also increasing.
According to (Dapiran et al., 1996 and Wilding and
Juriado, 2004), logistic activities to be outsourced
can be divided into two main categories such as
execution and planning activities and these two
categories can be further divided into two levels
respectively.
Method
Execution activities may include transportation
and warehousing as Level 1 and value added
activities as Level 2, whereas planning activities
include transportation & inventory &
management as Level 3 and management of
distribution network (Total outsourcing) as
Level 4.
Planning level activities associated with setting
goals, formulating strategies and to achieve
those goals outlining of schedules and
responsibilities whereas execution level
activities are concerned with executing tasks.
Execution Activities:
Level 1: According to (Lieb, 2002 and Wilding
and Juriado, 2004) level 1 comprises of
warehousing and transportation. At this initial
level, the LSP’s (Logistics Service Provider) and
their clients do not have long term contracts
with each other. A freight carrier may perform
this function that can move any sized unites by
sea, land, rail and air in a timely manner.
Customers are requiring the delivery of material
by following the just in time principles. A
disaster in order fulfillment can be created, if a
single point of failure in warehousing occurs.
Therefore, companies require and efficient end
to end supply chain (Vaidyanathan, 2005).
Level 2: Value-added activities are considered
as level 2 activities; these tasks have moved to
distribution now as part of final processing
which were normally performed by
manufacturers. Packaging or labeling etc. are
including in these tasks. The duration of the
contract between LSP’s and their clients is
normally for one year or less (Lieb, 2002; and
Wilding and Juriado, 2004).

3. Logistics Outsourcing-MethodPage 3
Activities of Planning and Control:
Level 3: Lieb (2002) suggests that planning and
control activities of logistics outsourcing are
considered as level 3 kind of activities, like
management of inventory and transport. Secondary
activities of transportation management comprises of
scheduling and route planning, and event control.
Secondary activities of inventory are stock control,
event control and sales forecasts. The skills of LSP’s
are complementary to their clients and offer
customized logistics solutions. This function includes
inventory visibility, backorder capability and
fulfilment, order-entry management, forecasting,
cycle count and auditing, shipment management,
routable pool planning, and customs documentation.
A planning solution system focusing on the unique
complexities of company and customer needs is
essential for inventory management and logistics.
The system must optimize inventory based on
service contracts and required response times, it
must possess capability of forecasting on product
basis utilizing product life curves. Stocking locations
and placement of warehouses and automation of
replenishment of parts should also be optimized
through inventory management system (Vaidya
nathan, 2005).
Level 4: Outsourcing the distribution network
management is considered as level 4 activities. At
level 4 activity, decisions relating to restructuring of
supply chain are made, for example, redistribution of
inventory between tiers, changing warehouse
structure, mode, reassignment of jobs between
levels, change in network of transportation,
reassignment of tasks and responsibilities among
chain units and consolidation points (Van der Vorst
et al., 2007). The firm’s capacity to supply required
goods at an acceptable cost and in the required
release time can determine the logistics service
performance (Stank et al., 2003). The complex
connection between service performance and levels
of outsourcing defined by (Hsiao et al., 2009), are
that service performance (flexibility, lead time and
delivery reliability) has no direct influence of
outsourcing whereas the performance (when
outsourcing total distribution network management)
activities enhance with the rising level of demand
complexity.
Customer service and cost has become the most
frequent measure to assess and design the
usefulness of logistics systems. Analysis of cost-
benefit is usually used as the standards for physical
distribution. Traditionally, the cost goal for physical
distribution has come from the orientation that all
functions of logistics are perceived as “cost centres”
and therefore the sub goal for physical distribution
is to reduce costs Mentzer & Konard (1991).
Logistics performance especially cost has positive
impact of logistics outsourcing (Power et al., 2006).
Better consumption of facility and improved capital
allotment is the major reason of reduction in cost
through logistics outsourcing. LSP’s can better
utilize the capacity because backhauls are often
available and ups and downs of the transport
quantities can also be counterbalanced offered by
different clients. Therefore, by taking the benefit of
economies of scales, among others, the LSP’s can
achieve a greater degree of efficiency. Furthermore,
better allocation of manufacturer’s capital is also
possible, e.g. avoiding from spending in trucks or
storage for the reason of supply capacity.
Reduction in lead time, a major requirement of
customers through many reformation strategies,
shortest transport, together with quicker form of
transportation, or abolishing local inventory reserve
points is possible through logistics outsourcing.